Rays of Light for Retailers

"Energy prices aren't meaningless, but compared to the numbers coming out of the housing market, this drop in oil prices is an absolute drop in the bucket," says Davidowitz.

He says the housing boom of recent years drove consumer spending and the economy, and investors have yet to fully come to terms with what its end will mean for the economy and the stock market. He predicts a soft holiday shopping season followed by a recession in the second quarter of 2007.

Woody Dorsey, president of research company Market Semiotics, says retail investors' latest exuberance looks like an overreaction.

"Oil prices have been due for a correction, and now we're getting a nice correction here that is obviously positive for stocks," says Dorsey. "But it probably makes sense not to read too much into it. It may be a bit of a breather for the consumer and the market, but this rally is more a reflection of a tactical trading kind of environment then any change in the macroeconomic outlook."

Richard Hastings, a retail analyst with Bernard Sands, agrees.

"It's very likely that later this year, oil prices will go back and the risk premium for retailers will remain in place," says Hastings. "That said, earnings still look great, and there are many retailers out there that will continue to perform even if consumer spending does slow in the months ahead."

He also agrees that the data coming out of the housing market are troublesome, but he says whatever correction is in store won't cause a major shock to the economy.

"It's very serious and dangerous, but it's not like a stock market collapse where everybody pushes the sell button at the same time," says Hastings. "Whatever happens, it's going to be slow and continuous and steady, and as far as the overall economy goes, that process could provide a soft landing."

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